Will a rate cut influence the ASX or will the share market influence a rate cut?
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The majority of finance experts are expecting a rate cut from the Reserve Bank of Australia (RBA) on Tuesday afternoon.
The Reserve Bank board will announce at 2.30pm its almost-monthly decision on the cash rate.
Comparison site Finder surveyed 43 industry experts and found 29 of them forecast a cut this month.
Of those expecting a reduction, most of them thought it would be a cut of 15 basis points, taking it from 0.25% to 0.1%. Only 5 experts thought it would be a smaller 10 basis point shave.
“The RBA’s own forecasts show that it will not achieve its employment and inflation objectives over the next two years and so further easing is required to help address this,” said AMP Capital chief economist Shane Oliver.
“Recent RBA commentary has provided a strong signal that further easing is imminent. We expect this to take the form of a rate cut to 0.1% and broad-based quantitative easing.”
Could the share market influence the RBA?
Finder insights manager Graham Cooke is in the opposing camp but reckons the share market’s behaviour on Monday could have a bearing.
“My hunch, despite economist’s predictions, is that the tone of the recent comments from the deputy governor indicate that a November cut is actually unlikely,” he said.
“Keep an eye on the ASX 200, however – any significant slide [Friday] or on Monday could spook the board into a Melbourne Cup day cut.”
A rate cut of 15 basis points would equate to a roughly $15,000 saving over the life of an average home loan of $479,801.
A cut in interest rates would buoy ASX-listed businesses as credit becomes even cheaper.
But it usually puts downward pressure on the share price of the major banks Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ).
Why cut the cash rate now?
CLSA Premium chair Peter Boehm said the path was clear for a rate cut now that the federal government has delivered the budget.
“Now that… states are showing reasonable signs of economic recovery (other than Victoria), further easing of monetary policy will likely be supported by the RBA,” he said.
It was only a few months ago the RBA indicated the current 0.25% would be the lowest it would go.
The fact that it may now cut it further indicates how bad the economy has been ravaged by COVID-19, according to Cooke.
“The cash rate has already dropped 125 basis points in the last two years, so a further 10-15 point cut is unlikely to have much of an impact on the economy,” he said.
“However, our experts seem to think that the RBA is in ‘every little bit helps’ mode.”
Corinna Economic Advisory economist Saul Eslake agreed with that sentiment, backing a cut on Tuesday.
“RBA has signaled pretty clearly that it thinks it can and should do more to support the economic recovery, speed the return to full employment and get inflation back into the target band.”
Equity Economics economist Angela Jackson thought the RBA would leave the cash rate untouched.
“While they may be concerned with lack of momentum in jobs data, they will wait to see if Victoria reopening and state borders opening helps spur the recovery before moving rates down further.”
After Tuesday, the RBA board has one more meeting this year in December before it takes a break in January.
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.